10 Top Challenges and India

When I was documenting ‘Unstoppable India’, I came across a report of the economists Jim O’Neill and Tushar Poddar of Goldman Sachs* and Co.that recommends 10 things India needs to do to achieve a per capita GDP of at least $20,000 (Rs8.58 lakh today) by 2050. India could be 40 times bigger by 2050, and may also have the potential to be larger than the US by that time. It’s a must reading for everyone with a dream to see India developed or a giant economy and may be, superpower. The 10 top challenges are:

1) Improve governance
Better governance, delivery systems and effective implementation will be essential to educate its citizens, build its infrastructure, increase agricultural productivity and ensure best result of economic growth. A large gap between physical access to services and the quality of services provided is leading to a citizen satisfaction gap.

2) Raise educational achievement

Raising India’s educational achievement is a major requirement to help achieve the nation’s potential. A vast number of India’s young people receive no education. A number of initiatives, such as a continued expansion of Pratham and the introduction of Teach First, for example, should be pursued.

3) Increase quality and quantity of universities

At the other end of the spectrum, India should also have a more defined plan to raise the number and the quality of top universities. The likely numbers seeking higher education can be expected to grow by three of four times by 2020 from the current number of around 10 million. The National Knowledge Commission recommended an increase in the number of universities from 350 today to 1,500 by 2016. 15% of the18-24 age group must be educated to university level from 7 to 15 per cent.

4) Control inflation

India’s currently rising in inflation is a worry and challenge. A formal adoption of Inflation Targeting (IT) would be a very sensible move to help India persuade its huge population of the (permanent) benefits of price stability. Greater independence for the Reserve Bank of India and the abolishment of all FX controls are recommended.

5) Introduce a credible fiscal policy

India should introduce a more credible medium-term plan for fiscal policy. Targeting low and stable inflation is not easy if fiscal policy is poorly maintained. It would be helpful to develop some ‘rules’ for spending over cycles. India’s gross fiscal deficit remains one of the highest in the world and, recently, government liabilities have been increasing at an alarming rate. The situation will further accentuate due to a large debt-waiver for farmers, a big wage hike for civil servants, increasing fertiliser and oil subsidies, and higher exemptions on income tax. At such high levels, government borrowing crowds out private-sector credit, keeps interest rates high, adds to already high government debt, and becomes a key source of macro vulnerability. Expenditures must be directed towards much-needed areas such as health, education and infrastructure, which could enhance growth-but rather on wages and subsidies. A medium-term strategy for fiscal policy, which reduces the overall deficit to a sustainable level, is critical for India.

6) Liberalise financial markets

India’s financial sector is dominated by the state, holding 70 per cent of banking assets, a majority of insurance funds and the entire pension sector. Total credit, at 50 per cent of GDP remains well below that of its Asian neighbours (an average of over 100% of GDP) and especially compared with China (111% of GDP). Within this, consumer credit remains abysmally low (at 11% of GDP) compared with an Asian average of over 40% of GDP. Household savings tend to be in physical assets and gold, and risk diversification channels are not available. India needs to pursue financial reforms to channel savings effectively into investment, meet funding requirements for infrastructure and enhance financial stability.

7) Increase trade with neighbours

India currently accounts for no more than 1.5% of global trade. India still ranks below the average of all developing countries. India takes just 1.93% of China’s exports and provides just 1.46% of its imports. Total trade with the US in 2007 was just $42bn. For comparison, total US trade with China in 2007 was $405bn. Similarly, total Indian trade with China was just $37bn.If India can be encouraged to think increasingly ‘global’, the virtuous benefits of trade with other emerging giants with large populations could be a source of considerable upside surprise for India.

8) Increase agricultural productivity

Increasing agricultural growth is critical. Currently, 60% of the labour force is employed in agriculture, which contributes less than 1% of overall growth. India’s agricultural yields are a fraction of those of its more dynamic Asian neighbours. For instance, rice yields are a third of China’s and half of Vietnam’s. Agriculture must be treated as a great opportunity for India. Better specific and defined plans for increasing productivity in agriculture are essential.

9) Improve infrastructure

India’s constraints in infrastructure are well known, be it the clogged airports, poor roads, inadequate power, delays in ports. Indian companies on average lose 30 days in obtaining an electricity connection, 15 days in clearing exports through customs, and lose 7% of the value of their sales due to power outages. Incremental demand for infrastructure will continue to increase due to economic growth and urbanisation. India needs almost to double its ports, roads, power, airports and telecom in the next five years to sustain growth.

10) Improve environmental quality

India’s high population density, extreme climate and economic dependence on its natural resource base make environmental sustainability critical in maintaining its development path. India must move to take care of the effect of urbanisation, industrialisation and ongoing global climate change on India’s environment. Achieving greater energy efficiencies and boosting the cleanliness of energy and water usage would increase the likelihood of a sustainable stronger growth path for India.

It is not that nothing is being done, but the speed is slow and irritating. It is not happening in all regions. South is racing ahead, but the North is still not development- oriented. While Delhi Metro completes project ahead of time, NHAI has gone laggard and is still years behind in completing its expressways- GQ and NSEW corridors. Taj Expressway is still at land acquisition stage. Bihar has done wonderful in reducing the number of children out of school in 6-14 age group, but UP is slow. Few IAS officers are performing excellent, but many still work for self. While IT and telecom is racing ahead, many sectors are slow to emulate. 8 IITs may start operating by next year, but why should not the state review the performance of many of its existing educational institutions that have gone abysmal? Gujarat has made India the largest producer of milk, why can’t other states follow the same? What stops the states make its agriculture universities reach villages and improve the productivity that requires only change in practices? Can all politicians and the babus make these 10 challenges their priorities?
*Goldman Sachs Global Economics paper no 169: Ten Things for India to Achieve its 2050 Potentials
Read “The I in BRIC”

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